UOB Kay Hian analysts John Cheong and Heidi Mo have downgraded Food Empire to “hold” after seeing “near-term headwinds” such as high coffee costs and the devaluation of the Russian ruble against the US dollar (USD).
Even though Food Empire’s earnings for the 1HFY2024 ended June 30 fell by 11.3% y-o-y to US$23.6 million ($30.8 million), this remained in line with Cheong and Mo’s expectations at 51% of their full-year estimate.
The y-o-y decline is largely due to short-term price disruptions in the Russian market, and increased raw material prices and operating costs and partly offset by higher contributions from the rest of Food Empire’s operating markets, the analysts note in their Sept 4 report.
As a result, the company’s 1HFY2024 gross margins fell by 5 percentage points y-o-y to 30% while net margins declined by 3 percentage points y-o-y to 10.5% respectively, albeit still matching Cheong and Mo’s estimates.
In Russia, Food Empire saw a 3.6% y-o-y decline in revenue to US$68.1 million mainly due to the depreciation of the Russian ruble against the USD as well as from customers’ excess stock levels.feh
“We expect this to continue to impact Food Empire’s near-term performance as it will take time for customers to deplete their stockpile. We note that in local currency terms, the segment saw a substantial 13.4% y-o-y growth, due to increased promotions,” Cheong and Mo write.
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The company is also expected to face continued pressure in margins on the back of higher coffee prices next year. In addition, the ongoing Russia-Ukraine conflict may also add to logistics and distribution costs.
“Food Empire will need time to stabilise prices to maintain revenue and margins, which are partly determined by varying stock levels amongst retailers, before it can raise prices in the Russia market. We therefore expect gross margins to remain muted at 29% - 30% for FY2024 – FY2026,” the analysts add.
Given the near-term headwinds, the analysts have lowered their dividend forecast to 5 cents per share from 10 cents per share as they no longer expect Food Empire to distribute special dividends during the year. The company is also likely to need to finance its new production facilities, the analysts note.
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Food Empire previously announced that it planned to build a second snack production factory in Malaysia by 1H2025. It also aims to build its first coffee mix production facility in Kazakhstan by the end of 2025.
That said, the analysts remain somewhat upbeat on Food Empire’s prospects.
Referring to a report by Allied Market Research, the analysts note that the global instant coffee market is expected to grow at a compound annual growth rate (CAGR) of 6.4% to reach US$60.7 billion from 2023 to 2032, due to busier consumer lifestyles and changing consumer preferences.
“By region, we note that Southeast Asia has the largest growth potential with a projected 3.7% CAGR to reach US$6 billion by 2029, while South Asia is the fastest growing at 6.7% CAGR to reach US$0.9 billion in the same year,” they add. “Given Food Empire’s growing market presence in these markets, we think that Food Empire is well-positioned to meet the rising global demand for instant coffee.”
In addition to their downgrade, the analysts have lowered Food Empire’s target price to $1 from $1.30 which is based on Food Empire’s FY2024 earnings per share (EPS) valuation of 8.4 times. The new target price is also pegged to 0.5 standard deviation (s.d.) below the counter’s long-term historical mean. This is lower than the previous mean to reflect the more challenging environment, in light of coffee price volatility and geopolitical risks from the Russia-Ukraine conflict, say the analysts.
As at 12.33pm, shares in Food Empire are trading 1 cent lower or 1.01% down at 98.5 cents.
